Econ-E201: Intro to Microeconomics Exam 1

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What is the law of demand?

All other things being the same, higher price = lower quantity demanded (a downward sloping curve)

How to determine the marginal benefit and marginal cost of doing something?

Marginal benefit = the incremental benefit of the last unit Marginal cost = the incremental cost of the last unit

What is market equilibrium? What is equilibrium price? What is equilibrium quantity?

Market equilibrium = the intersection of the supply and demand curve Equilibrium price = the price at market equilibrium Equilibrium quantity = the quantity at market equilibrium

Why the direction of price change does not affect price elasticity of demand?

By using the average, the direction of change doesn't matter

What is the relationship between price and total revenue?

Changing price can increase or decrease total revenues.

What is the basis of mutually beneficial trade?

Comparative advantage, but not absolute advantage

What is the principle of rational choice?

Compare the marginal benefit to marginal (opportunity) cost. If the marginal benefits are greater than the marginal costs, do it. If the costs are greater than the benefits, don't do it.

What will happen to marginal costs if a PPF is concave to the origin? What if the PPF is linear?

Concave PPF=implies increasing marginal costs Linear PPF=implies constant marginal cost

How can two economies gain from trade and specialization?

Each produces comparative advantage goods and they trade.

What is the economic interpretation when a PPF expands?

Economic Growth

Why the demand and supply model predicts that the market price should be the equilibrium price and the market quantity should be the equilibrium quantity?

If price is above equilibrium price, there is surplus, price goes down, quantity supplied goes down, quantity demanded goes up. If price is below equilibrium price, there is shortage, price goes up, quantity supplied goes up, quantity demanded goes down

What is microeconomics and what is macroeconomics?

Microeconomics=deals with individual markets (zip code or city) Macroeconomics=deals with aggregate markets (national and international)

How price elasticity of demand is affected by the availability of close substitutes, the proportion of income spent on the good, and on the time since price change?

More substitutes = more elastic demand Higher prices = more elastic demand More time = more elastic demand

What is quantity demanded and what is demand?

Quantity demanded = the quantity that consumers are willing and able to buy at a particular price point Demand = the quantity demanded at all price points

What is quantity supplied and what is supply?

Quantity supplied = the quantity that sellers are willing and able to sell at a particular price point Supply= the quantity supplied at all different price points

Why should we care about opportunity cost?

Scarcity means we need to make choices. Opportunity cost allows us to make the best decision

How to calculate opportunity cost on a PPF?

Slope and inverse slope

What is Production Possibilities Frontier (PPF)?

The boundary between the combinations of goods and services that can be produced and the combinations that cannot be produced, given the available factors of production and the state of technology.

What is the interpretation when there is a movement along a curve in a two-dimensional diagram?

There is a change in marginal cost or benefit depending on opportunity cost spent

What is the interpretation when a curve shifts in a two-dimensional diagram?

When the marginal cost is entirely changed for the situation

How supply is affected by the following factors? a. Price of a factor of production b. Price of a substitute in production c. Price of a complement in production d. Seller expected future prices e. Number of suppliers f. Production technology g. State of nature

a) higher price = decreased supply b) higher price = increased supply c) higher price = increased supply d) higher price = decreased supply e) more sellers = increased supply f) lower production cost = increased supply g) natural disaster = decreased supply

How demand is affected by the following factors? a. Price of a substitute in consumption b. Price of a complement in consumption c. Consumer income d. Consumer expected future prices e. Consumer population

a) increased price = increased demand b) increased price = decreased demand c) increased income = higher demand for normal goods and lower demand for inferior goods d) increased price = increased demand e) more people = more demand

How the equilibrium price and quantity are going to change in the following situations? a. Increase in demand b. Decrease in demand c. Increase in supply d. Decrease in supply e. Increase in demand and supply f. Decrease in demand and supply g. Decrease in demand and increase in supply h. increase in demand and decrease in supply

a) price up and quantity up b) price down and quantity down c) price down and quantity up d) price up and quantity down e) price variable and quantity up f) price variable and quantity down g) price down and quantity variable h) price up and quantity variable

What is the interpretation when a bundle of goods is on/inside/outside a PPF in terms of: a. Feasibility? b. Opportunity cost? c. Efficiency?

a. On and inside PPF=feasible, outside=infeasible b. Inside PPF=0, on PPF=slope, outside PPF=N/A c. Inside PPF=inefficient, on PPF=efficient, outside PPF=N/A

What is the law of supply?

an increase in price results in an increase in quantity supplied

What is price elasticity of demand, verbally and mathematically?

change in quantity demanded / change in price

What is demand responsiveness?

change in quantity demanded due to change in price

Why we cannot use the slope of a demand curve to measure demand responsiveness?

demand curves are effected by units

When price goes down, which is the change in total revenue when demand is elastic, unit elastic, inelastic?

elastic = more revenue unit elastic = no change in revenue inelastic = less revenue

What is perfectly inelastic demand, and what is perfectly elastic demand, verbally and graphically?

perfect inelastic demand = a vertical graph and zero demand responsiveness perfect elastic demand = horizontal graph and infinite demand responsiveness

On a linear and downward sloping demand curve, what is the price elasticity of demand at the upper end point, above the mid point, at the mid point, below the mid point, at the lower end point?

upper = perfectly elastic above middle = elastic middle = unit elastic below middle = inelastic lower = perfectly inelastic

Why price elasticity of demand is unit free?

Because we take the average, all units cancel out

What is positive analysis? What is normative analysis?

Positive analysis = Making predictions without value judgements Normative analysis = Making predictions with value judgments

What is the opportunity cost of doing something when 3 or more alternatives are available?

The highest valued alternative

What is the opportunity cost of doing something when both money and time are involved?

The highest valued alternative in terms of money and time cost

How to draw a two-dimensional diagram to represent relationship among 3 variables?

The marginal benefit line intersects with the two potential marginal cost lines

What is comparative advantage?

the ability to produce a good at a lower opportunity cost than another producer

What is absolute advantage?

the ability to produce more than another company

What is marginal cost?

the cost added by producing one additional unit of a product or service.

What is opportunity cost?

the most desirable alternative given up as the result of a decision

What is the only factor that can change quantity demanded?

the price of the own good and nothing else (a movement on the same curve)

What is the only factor that can change quantity supplied?

the price of the own good and nothing else (movement on the curve)


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